By Calvin Biesecker

Rockwell Collins [COL] last Friday reported strong third quarter financial results due to improved operating margins and solid sales and the company raised its year-end earnings guidance a nickel.

Despite bleak headlines in the energy markets and the likelihood of near term capacity cuts in the airline industry, Rockwell Collins remains well positioned for continued sales and earnings growth, Clay Jones, the company’s chairman, president and CEO, said during an analyst call. Airline capacity cuts are expected to be the most significant headwind the company faces in terms of aftermarket sales yet Jones believes the impact to Rockwell Collins will be minimized by the fact that mostly older aircraft, which the company has very little content on, will be parked.

In defense, Rockwell Collins believes spending over the next few years will be in line with inflation, Jones said. However, he said there will be several areas–network communications, open systems architecture applications, and advanced munitions guidance–that will outpace inflation and these all represent core strengths of the company.

Net income in the quarter increased 19 percent to $174 million, $1.07 earnings per share (EPS), versus $146 million (86 cents EPS) a year ago, exceeding consensus estimates by five cents. Operating margins improved nearly 2 percent due to the higher sales, productivity improvements in its Commercial and Government Systems segments, and lower employee incentive compensation costs. The company also said that favorable contract adjustments in the government business helped boost earnings.

Sales grew 7 percent to $1.2 billion from $1.1 billion, with the commercial aircraft segment up 8 percent and government systems up 7 percent. Commercial growth was driven by higher sales to airlines and aircraft original equipment manufacturers that more than offset a slight decline in aftermarket revenues.

Defense sales were up largely on international C-130 upgrades, E-6 aircraft mission system upgrades, the Ground-Based GPS Receiver Application Module and a United Kingdom precision targeting system.

For Rockwell Collins, fiscal year 2008 earnings guidance was increased by 10 cents on the low end and five cents on the high end to between $4.05 and $4.10 EPS. Sales are still expected to be around $4.8 billion.